FTSE Russell Insights

Time to re-grow some (inflation) hedges overseas?

February 23, 2026

12 min

Robin Marshall

Director of Fixed Income Research at FTSE Russell

Jack Fischer

US Fixed Income Product Lead

Inflation linked govt bonds suffered weak performance during the period of higher inflation and policy rates, throughout the G7, in 2022-23, and were not helped by high initial valuations and negative real yields. We pointed out why they (like other inflation hedges) often under-perform in these higher inflation periods in an earlier paper [note1] , despite bond valuations being linked to inflation accruals. The main reason for this apparent paradox is that higher discount rates applied to future cash flows squeeze the present value of the bonds hard, particularly longer duration bonds, and overwhelm the positive effect on the principal of the bonds from higher inflation accruals.

However, with real yields on inflation linked securities (ILS) now strongly positive and near multi-year highs, and the US dollar outlook more uncertain, this asset class now creates new opportunities, particularly for US investors willing to look abroad, as we explain in our longer paper, just published [note2]. For investors who accept the view inflation is returning to a low and stable regime, albeit a little above 2% inflation targets, and unlikely to lead to a renewed surge in central bank policy rates, Chart 1 shows how real yields on these bonds have increased since 2020-21, for the 4 largest weighted countries in the FTSE Russell World inflation linked securities index (WILSI), driven by higher central bank policy rates, and how they remain high, relative to the 10 yr means and period of low, and sometimes negative real yields pre-Covid. Entering the sector at these higher real yields improves the opportunity for attractive inflation-adjusted returns. [note3]

Inflation breakevens, which measure the inflation compensation investors receive for holding nominal bonds versus the real yield on linkers, also suggest linkers are now attractively valued. After the global inflation shock in 2021-22, nominal bond yields spiked as investors sought extra yield inflation protection. So inflation breakevens soared, as Chart 2 shows, particularly in short dated maturities. But since inflation has fallen back in 2024-25, breakeven inflation compensation has fallen in nominal bonds, relative to inflation linked bonds, as they recovered and nominal yields fell, and is now barely above 2% per annum for all maturities, as the Chart 2 shows.

The relative value case for inflation linked govt bonds, within the fixed income asset class, is reinforced by credit spreads, which are at, or very close to 10 yr lows, and well below 10 yr means, as Chart 3 shows.

Most discussion of international fixed income focusses on sovereign (nominal) debt, investment-grade and high yield credits, packaged into developed market, or emerging market exposures, so ILS are often overlooked. Lower issuance in ILS versus nominals may also explain why linkers are often a forgotten asset class - since 2008, the ILS market has accounted for only 8.0% of the international total for fixed-rate, local currency sovereign debt issuance, as tracked by FTSE Russell indices. But despite both Canada and Germany announcing they will no longer be issuing new inflation-linked debt, the amount outstanding in international ILS has still grown 24% over the past five years.

For investors, inflation linked govt bonds offer protection both against inflation, and deflation, ie, an outright decline in price levels, unlike nominal bonds with fixed nominal coupons (although there are some subtle structural differences across countries, ie, UK and Canadian linkers do not have deflation floors). They are very rare financial assets in that regard, with virtually no credit risk, given they are issued in local currencies.

FTSE Russell’s range of international linker indices includes both those with exposure to US Treasury inflation protected securities (Tips) and those without Tips. Having a range of international inflation linked indices gives an investor the opportunity to play this investment theme globally, excluding US Tips and dollar exposure if required, and also adding EM exposure. Table 1 shows a summary of three indices: the FTSE Russell World inflation linked securities index (WILSI), the WILSI ex-US, and the FTSE International Inflation-Linked Securities Select Index (SILSI), which includes EM economies.

. Table 1 shows a summary of three indices: the FTSE Russell World inflation linked securities index (WILSI), the WILSI ex-US, and the FTSE International Inflation-Linked Securities Select Index (SILSI), which includes EM economies.
Key statistics	WILSI	WILSI-ex US	SILSI
No of bonds	169	120	182
No of countries	13	12	19
No of currencies	10	9	16
Full MV weighted
Average coupon (%)	1.25	1.28	1.63
YTW (%)	4.21	4.40	6.69
Effec. Duration	7.03	8.55	6.08
OAS (bps)	2	7	37
Ave. Credit rating	AA	A+	A+
Duration dollar weighted
Average coupon (%)	1.18	1.15	1.73
YTW	4.74	4.90	5.96
Eff.Duration	12.01	13.71	10.23
OAS (bps)	2	2	7
Credit quality (%)
Investment grade	100.0	100.0	83.2
High yield	-	-	16.8
Country Classification
Developed Markets	93.5%	88.7%	67.4%
Emerging Markets	6.5%	11.3%	32.6%

Source: FTSE Russell Index Module (FIXM). Data as of 01.31.26. Past performance is not a guide to future returns. Please see the end for important legal disclosures.

WILSI follows standard fixed income index methodologies, such as requiring a minimum amount outstanding for bonds to enter the index, monthly rebalancing, and market capitalization weighting. These rules follow the standards set by the FTSE World Government Bond Index (WGBI)[note4]. This structured approach produces an index that is highly rated, developed market-focused, and maintains a strong liquidity profile [note5], with a high US country weight of over 40%. SILSI casts a wider net in the international inflation-linked securities market while simplifying WILSI’s eligibility criteria. SILSI expands ILS coverage through the addition of seven markets and a lower minimum credit quality. As with most international and global indices tracked by an index-linked fund, SILSI also applies an issuer capping methodology for the fund to maintain Regulated Investment Company (RIC) compliance.

Because EM issuers of inflation linked debt have higher real yields, but shorter duration than DM issuers, the EM weighting in the SILSI index reduces overall duration and duration risk, relative to the WILSI and WILSI ex-US, making the index less vulnerable to duration shocks of the kind that impacted government bonds severely in 2022-23. In contrast, the WILSI is dominated by G7 issuers with longer dated bonds, often targeted at domestic pension funds and insurance companies with long-dated liabilities. In addition, SILSI’s RIC capping and weighting rules improve the diversification of risk across countries, currencies, and regions. Chart 4 shows the higher real yields available in the SILSI index and EM inflation linked, relative to the WILSI ex-US index.

The SILSI index construction creates a crossover, hybrid design, diversifying across developed and emerging market countries, with exposure to both HY and IG ILS. On relative valuation, the elevated real yield provides a tactical entry point, allowing more room for reward if inflation surprises to the upside or real yields compress. The WILSI cap-weighted ex-US index, on the other hand, remains heavily concentrated in the longer-dated securities issued by the most indebted countries in the index, as Chart 5 shows.

The average index credit rating is also worth noting. SILSI (A+) matches the index-level weighted average credit quality of WILSI (A+) despite SILSI having a broader distribution. The only two broad-based international focused indices with higher average ratings are WGBI ex-US (AA-) and WorldBIG ex-USD (AA-)—WGBI ex-US comprises about 70% of WorldBIG ex-USD.

Finally, within the fixed income asset class, combining duration and spread into the composite metric of duration times spread (DTS), SILSI scores well against alternative linker indices. The attraction of DTS as a metric is that it captures the two primary risk factors to fixed income – credit risk and interest rate risk. Chart 6 shows DTS on the X-axis, while the y-axis shows yield-to-worst.

Chart 6 shows DTS on the X-axis, while the y-axis shows yield-to-worst. — Source: FTSE Russell, Index module, data as of November 30,2025. Past performance is not a guide to future returns. Please see the end for important legal disclosures.

In conclusion, both absolute real yields and relative valuation metrics suggest inflation linked govt bonds may now be undervalued against other asset classes within fixed income, notably credit but also conventional govt bonds. A more stable inflation and interest rate environment enhances the appeal of international inflation-linked bonds, with solid inflation accruals.

For investors anxious to reduce and minimise US dollar risk, given the more uncertain dollar outlook, there are FTSE Russell indices available to play the international inflation linked investment narrative, excluding US Tips, both with, and without EM exposure.

Indices with some EM exposure, like the SILSI index are particularly attractive. It offers significantly higher real yields than WILSI, ex-US, shorter duration risk, low breakevens, high real yields and inflation protection with non-USD sovereign backing.

Research

A Re-Emerging Portfolio Building Block: The Case for International Inflation-Linked Securities

International fixed income has been one such area—it is not only being revisited but dynamically redefined.

View the report Opens in a new tab

[1] See Time to trim some (inflation) hedges? | LSEG | Back to Note 1

[2] A Re-Emerging Portfolio Building Block: The Case for International Inflation-Linked Securities | Back to Note 2

[3] See Do valuations correlate to long-term returns? Examining US equities through various size and style indices | LSEG | Back to Note 3

[4] FTSE World Government Bond Index (WGBI) Series | LSEG | Back to Note 4

[5] For further details on FTSE Russell’s Fixed Income country classification framework, please see: Fixed Income Country Classification | Back to Note 5

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